The Stage of Organizational Innovation and Informal Knowledge
The previous section highlighted the fact that knowledge from informal external sources drawn from various social communities can play an important role in organizational innovation. However, effectively utilizing this knowledge is not without its challenges. We suggest here, that organizational learning from external and informal sources can be seen to have three distinct stages. The first stage involves the firm (or its employees) scanning the environment as it searches for informal knowledge useful to managerial, technological, or organizational innovation. Thus, the first stage is concerned solely with identifying potentially useful knowledge. Once the sources of potentially useful knowledge have been identified, the next challenge is to access and transfer this knowledge from the external constituent to the firm. It is in the second stage of transfer that knowledge actually crosses firm boundaries, and is brought in to the firm and becomes a part of the firm’s internal knowledge stock. Finally, the organization must integrate the transferred knowledge with its internal knowledge to utilize it effectively and create value. In this last stage, we are concerned with the recombination of knowledge within firm boundaries that results in innovation. Given that informal sources of knowledge are important for organizations, yet varied and sometimes hard to identify, we examine the implications of this on each of the steps of innovation and learning.
The nature of search for external knowledge
How do firms search for external knowledge? An important idea emerging from the evolutionary perspective is that learning and search for external knowledge is typically ‘path-dependent’ (Nelson and Winter, 1982). This idea implies that a firm’s past experience and expertise shapes its future decisions and hence the patterns of its knowledge search. The notion of path dependence is intertwined with that of local search. The concept of local search, embedded in evolutionary theory (Dosi and Nelson, 1994; Nelson and Winter, 2002) suggests that a firm, when seeking to innovate, will consider options in the neighborhood of its current activities, thus making radical change less likely. Research in organizational learning (Cyert and March, 1963; March and Simon, 1958) also makes a similar point regarding the search for new knowledge. This literature suggests that boundedly-rational decision makers rely on established organizational practices to drive the search for knowledge. Organizational theorists see learning as a process that involves trial, feedback, and evaluation. If too many parameters in the learning process are changed simultaneously, the ability of the firm to engage in meaningful learning is attenuated (Teece et al., 1997).
The evolutionary perspective of the firm suggests that routines, or ‘socially constructed programs of action’ drive organizational behavior. These routines are relatively stable and greatly influenced by the experience and history of the firm and the individuals therein (Baum and Ingram, 2002; Nelson and Winter, 1982). Firms thus recognize and absorb external knowledge close to their existing knowledge base and utilize them in established ways (Cohen and Levinthal, 1990). Hence, even as firms seek to expand their knowledge stocks by looking externally, the resultant search processes are restricted to familiar and proximate areas. Thus, the search for new knowledge is often restricted to a firm’s current area of expertise and experience.
The local search argument assumes significant importance in the innovatory activities of the firm. Given the great size and uneven topography of all research projects that the firm is faced with, it turns to the ‘neighborhood concept’ to create an optimal strategy to allocate innovative effort across different technologies (Nelson and Winter, 1982). Technological learning tends to be local and opportunities for learning will be ‘close in’ to previous activities (Teece, 1988). The technological opportunity of a particular field of investigation will determine the strength of local search. Cantwell (1993) demonstrates that technological diversification has been greater for chemicals and pharmaceuticals than for electrical and electronic-related fields. He attributes this to the greater opportunities for innovation within the electrical and electronic fields than in chemicals and pharmaceuticals. Even for industries like semiconductors that are characterized by tremendous technological opportunities, technological search can be expected to remain fairly local.
It is not just technological search that is local but also geographic search. Studies of innovation and technology diffusion point to the geographic localization of knowledge. Jaffe et al. (1993) analyzed patent citation data to demonstrate that firms and universities acquire knowledge from others in geographically proximate locations. A key reason for geographically localized knowledge flows, research suggests, is the establishment of inter-firm linkages between firms in the region (Saxenian, 1991). These relational linkages may be formalized, such as alliances and supply relationships (Von Hippel, 1988), or informal, such as regional social networks (Rogers and Larsen, 1984) and mobility of engineers (Almeida and Kogut, 1999). Firms exploit these regional relationships to access knowledge from other local firms. Thus, the underlying reason for geographically local search is both organizational and relational in nature.
There are some advantages to local, contextually-bounded search: it restricts the breadth and, therefore, the cost of the search process. Geographically and technologically proximate search also results in the acquisition of knowledge that can be more easily recognized and managed by the organization’s existing routines and members. However, local search restricts the possibilities for innovation through recombination, since it blocks out the acquisition of novel and more distant knowledge. Indeed, Levitt and March (1988) warn of competence traps and Leonard-Barton (1992) suggests that core capabilities associated with existing routines can become core rigidities as circumstances change. Recent studies in the area of strategic management share the view that, given technological change and the dynamic nature of competition, firms must move beyond local search to compete successfully over time. Porter (1998) points to the emergence of geographically dispersed but specialized regions in various technologies and industries, emphasizing the need for geographically distant search. Kim and Kogut (1996) show that the dynamic of competition has encouraged semiconductor firms to diversify across technological sub-fields to maintain their competitive edge. Rosenkopf and Nerkar (2001) demonstrate that external exploration in distant technological domains yields innovations with more impact on a broader set of technological areas. No wonder March (1991) suggests that firms balance local search (exploitation) with more distant search (exploration).
One of the ways to achieve such a balance is by extending firms’ scanning capabilities through the utilization of informal conduits of knowledge. A firm’s scanning capability enables it to scan the environment and to recognize potentially useful knowledge in both local and distant contexts. So how can firms enhance their ability to stay abreast of new ideas and knowledge and, if necessary, innovate in emerging or new areas? Recent research gives us some hints about how firms may acquire and utilize the knowledge and capabilities to facilitate technological or organizational change. The evidence is that external, especially informal mechanisms can be used to absorb knowledge distant from a firm’s current expertise. At the formal and organizational level, Karim and Mitchell (2000) show that acquisitions can reinforce previous business activities (resource deepening) or help them undertake new and ‘path-breaking’ activities (resource extending). Rosenkopf and Almeida (2003) show that firms can acquire knowledge informally from geographically or technologically distant domains through informal (mobility) means and this knowledge helps them reach beyond the localness of search processes. At the individual level, Song et al. (2003) both highlight the tendency towards local search and point to one way of overcoming it: by hiring experts from other countries and firms. Hiring was only useful when the new engineers and scientists were employed outside a firm’s core areas. Hence, existing evidence suggests that in some instances external informal sources may be useful in helping organizations adjust their technological trajectories.
Why do informal sources help organizations scan more broadly? In technology, knowledge inputs and exchanges conducted at the individual level can provide them with an early and clearer picture of the emerging scientific and technological landscape and this expands the view of scientific and technological possibilities available to the firm. These external individual linkages across organizations can extend, not only the spectrum of possible scientific, technological, or managerial advances within the firm but, just as importantly, the perception of what is attractive (and unattractive) to them. Inputs, obtained and refined through external interaction and scientific collaboration, allow a firm to perceive global (rather than just local) optima and hence broaden the search process. Therefore, informal knowledge obtained through individual actions can play an important role in allowing firms to move beyond the constraints of local search but there is a need for firms to recognize the importance of this knowledge and specifically create routines that allow for the identification and subsequent absorption of this knowledge.
The sourcing and transfer of external knowledge
Recognizing the importance of outside knowledge does not necessarily permit a firm to access and transfer it. Nor does it explain which firms are best able to access knowledge or why firms are attentive to knowledge from certain sources and less attentive to others. To facilitate knowledge transfer firms must develop linkages to outside sources of knowledge that act as conduits for knowledge transfer (Cassiman and Veugelers, 2006; Dyer and Singh, 1998; Escribano, et al., 2009; Menon and Pfeffer, 2003). It is these conduits that channel the externally available knowledge, and determine which knowledge the firm actually uses in the innovative process. Of course, as outlined in the previous section, firms use a number of mechanisms that enable them to create conduits to external sources of useful knowledge. Besides traditional supply arrangements and the forming of strategic alliances (Mowery et al., 1996), the informal mechanisms include the hiring of scientists and engineers and the appropriation of informal networks in geographically proximate and other settings (Baum, Calabrese, and Silverman, 2000).
The utilization of mechanisms to access knowledge from external organizations (formal and informal) is facilitated by the possession of valuable internal knowledge, since a firm’s or individual’s knowledge base makes it more attractive to other organizations for the sharing of knowledge. For instance, Von Hippel (1988) describes how possession of knowledge serves as a prerequisite to arriving at inter-firm technology agreements that permit knowledge sharing and transfer. Thus, the ability of the firm to build and actively utilize mechanisms for external knowledge transfer is termed sourcing capability. Similar to scanning capability, it stems from the firm’s internal knowledge base and the knowledge of the individuals employed by the firm.
Sourcing capability reflects the firm’s ability to internalize knowledge existing in the environment and bring it within the scope of its own boundaries. For a firm to be successful at sourcing knowledge, it must understand the knowledge to be transferred, articulate it by coding it to facilitate transfer, and transfer it by using well-established reliable routines and then decode it once it has been transferred. This process is challenged when the firm draws upon knowledge obtained from numerous individual and often informal sources. The implication of obtaining knowledge from informal sources is that the sources of knowledge may be numerous and they are not restricted to identifiable levels of the hierarchy. Further, much of this knowledge may not coincide with the existing knowledge base of the firm or even match the established trajectories of innovation within the firm. It may, therefore, be more challenging to recognize the salience or the potential of newly acquired knowledge. Yet, absorbing this informal knowledge could be of critical importance, especially in dynamic industries. Hence, firms must develop new and wide-ranging routines that have been established to code and decode informal knowledge. This calls for a flexibility of organizational systems, processes, culture, and structures that recognize and validate knowledge that may emerge from unexpected and unconventional sources. Thus, while traditional thinking suggests the development of a few standardized routines that emphasize the reliability and durability of knowledge transfer routines, the extensive scope of knowledge from informal sources indicates the need for versatility of these routines and suggests that the underlying ability to articulate, code, and decode should be extended or applied to many types of knowledge. Firms with such flexible sourcing capabilities can transfer external knowledge from the environmental context to the firm. This leads to the last stage in the knowledge management process, integration.
Integrating knowledge
After knowledge has been absorbed from external sources and been transferred within firm boundaries, the challenge is to integrate it with knowledge existing in other parts of the firm. It was Schumpeter who first pointed out that innovation takes place by ‘carrying out new combinations’ (1939: 65). Henderson and Clark’s (1990) concept of architectural knowledge reinforces this idea, suggesting that a critical feature of a firm’s innovative ability may be the broader managerial capability to combine or link together knowledge within the firm. Thus, integration appears to be an important stage in innovation and value creation and may be specially challenging when external and informal knowledge sources are involved. The importance of the integration of knowledge within the firm becomes especially critical for firms with dispersed knowledge bases and for organization in dynamic technology environments.
The processes by which this geographically, technologically, and organizationally distributed knowledge is brought together by the companies may be different from the continual, intense knowledge sharing that has been advocated by some exponents of ‘the learning company.’ The key process is integrating specialized knowledge drawn from different locations—what Nonaka and Takeuchi (1995) refer to as ‘knowledge combination’ to create ‘systemic knowledge.’ The key to efficient integration from diverse external knowledge sources is the use of loosely-coupled modular designs that permits different individuals and groups to input their knowledge without overloading channels of communication and learning capacity of various units. For instance in interviews with engineers of semiconductor design firms, Fujitsu explained that its VLIW (Very Long Instruction Word) processor chip (used primarily for mobile phones, video compression, and other media-rich processing) was developed jointly by design teams in Tokyo, San Jose, and Frankfurt, but with each team working on specific modules and subsystems (these included a 16-bit instruction set, a 32-bit instruction set, a media instruction set, digital signal instruction set, and floating point instruction set). Segmented modular designs did not mean, however, that knowledge from different sources was reduced to codified knowledge capable of electronic transmission. Successful problem solving required linking with multiple knowledge bases often from a range of external sources: with university researchers on fundamental science, with customers on the functional and technical requirements of new products, with manufacturing engineers from a range of firms over fabrication issues, and with different design teams in order to access parallel experience and stimulate creative thinking. Most of these knowledge bases required accessing experience-based, intuitive knowledge of the tacit kind. A key characteristic of successful design teams was the ability to make full use of the form of computerized design tools and the company’s library of designs, while exploring new opportunities through drawing upon the deeply-engrained know-how of seasoned engineers and the creativity and persistence of younger team members. Tacit knowledge is accumulated through experience and is inherently uncodifiable. The transfer of tacit knowledge depends not only upon trial-and-error imitation but also cultural and social context. This cultural and contextual knowledge is a function of socialization, often over a substantial period of time. So what capabilities should the firm emphasize to enable knowledge integration within its boundaries? Just as scanning capability and sourcing capability enhance search and transfer stages of the knowledge management process, we posit that combinative capability improves the stage of integration.
The firm’s combinative capability is its ability to combine existing knowledge for innovation. This managerial ability of course, requires the transfer of knowledge from the points of access, with the boundary spanners and gatekeepers to other locations within the firm where this knowledge can be usefully exploited. How do organizations develop this combinative capability? The scale and scope of the firm’s knowledge stock which is enhanced by external (often informal) knowledge increases the potential for re-combinations within the firm. However, to capitalize on this potential, firms need to develop internal mechanisms that enable re-combinations. The role of internal communication systems is crucial in this regard especially since the sources and users of potential knowledge are likely to be numerous. Zenger and Lawrence (1989) point out that the ability to communicate knowledge across organizational sub-units depends in part on the prevalence of a shared language and culture. But mere communication of knowledge may not be sufficient to ensure its exploitation. The nature of innovation and the tacit and complex nature of knowledge may require that several individuals and sub-units interact actively across extended periods of time to build new products or processes (Westney and Sakakibara, 1986). To facilitate this knowledge integration process, firms must establish intra-organizational mechanisms, processes and systems to link individuals with access to external knowledge and various sub-units across time.